Legal Alert

Action Required: Pending DC Warranty Legislation May Significantly Impact Multifamily Developers

by Shanice McClelland and Shelah F. Lynn
October 27, 2022

Summary

The Condominium Warranty Claims Clarification Amendment Act of 2022, as proposed, will result in a major shift in many aspects of development in the District of Columbia that may substantially disadvantage developers of multifamily housing, including both residential condominiums and non-condominium rental apartment projects.

The Upshot

  • The bill substantially expands the rights of condominium associations and unit owners to obtain summary disposition of warranty funds without objective standards for review while denying developers due process, exposing them to potential severe penalties and increasing the likelihood of costly appeals and legal actions.
  • Among numerous other concerns regarding both the substance and procedures proposed, if passed, the strategy of filing shelf condominium registrations for apartment developments may no longer be a viable option.

The Bottom Line

The first reading is expected to be heard by the full Council of the District of Columbia at its next meeting on November 1, 2022. While there are no further formal opportunities to oppose the proposed bill, comments sent by email to housing@dccouncil.gov may still be considered.

This provides an update to our September 20, 2022 alert on the proposed expansion of condominium warranty legislation in the District of Columbia.

Ballard Spahr attorneys testified on September 22, 2022, as one of the only representatives of developer interests to provide oral opposition before the Committee on Housing and Executive Administration against the Condominium Warranty Claims Clarification Amendment Act of 2022 (B24-934) (the 2022 Bill).

Following the hearing, the 2022 Bill was marked up by the Committee on October 13, 2022, with no substantive modification. The first reading is expected to be heard by the full Council of the District of Columbia at its next meeting on Tuesday, November 1, 2022.  

The 2022 Bill, as proposed, will substantially disadvantage developers of multifamily housing, even impacting developers of rental apartment projects who commonly use the condominium registration process to allow for flexibility to subsequently change the project from rental to for-sale units and limit the impact of complex and costly conversion procedures, and to preserve future conversion rights.

If passed, the 2022 Bill will require that warranty security in the amount of 10 percent of the hard construction costs of the residential development be posted with the District at the time of condominium registration, as opposed to when the first unit is sold. This means that the strategy of filing shelf condominium registrations for apartment developments in order to preserve flexibility may no longer be a viable option. The 2022 Bill further proposes broad and subjective standards for establishing claims in favor of unit owners and condominium associations, and will deny developers due process and force them to initiate appeals to avoid summary disposition of warranty funds. 

Other significant concerns regarding the legislation include, among other things: 

  • There is no objective standard for what is considered a “Perfected Claim.”  As a result, there is no objective basis for DHCD to dismiss claims lacking sufficient technical or factual support.
  • The 2022 Bill expands what constitutes a structural defect to which the warranty applies.
  • As noted above, the 2022 Bill unreasonably shifts the time that warranty security must be posted from the time of sale of the first unit, when warranties first commence, to the time of registration, which can be months or years before any warranty obligation arises.
  • The warranty security posted must be automatically renewable.
  • It requires a sworn statement regarding the cost estimates for the construction costs used to determine the warranty security amount, updated cost numbers upon completion, and severe penalties if incorrect.
  • The 2022 Bill provides limited time for developers to respond to alleged warranty claims.
  • The Mayor (DHCD) has authority to make decisions on the cost of repair and pay out of the developer’s posted security without any applicable standards.
  • There is no funding for DHCD to scrutinize claims, defenses, and other issues using appropriate technical expertise.
  • Under the 2022 Bill, decisions are made first and due process follows after decision is made.
  • Warranty security must be held and not released or even reduced if any claim is pending notwithstanding the amount of the claims and the security. 
  • Reasonable dispute procedures in the condominium governing documents may be precluded.
  • The Mayor must establish a fund to provide financial assistance to unit owners and associations to assert claims (inspection costs, attorney’s fees, etc.).
  • The warranty commencement is now tied to the recordation of the special warranty deed for the first unit, and given common issues with delayed recording by the District should be tied to the conveyance date.
  • Deeds of Trust on unsold units have been eliminated as a statutorily approved, acceptable form of warranty security.
  • The 2022 Bill ignores any right of the developer to repair before decisions may be made by DHCD on the disposition of warranty security funds.

While there are no further formal opportunities to oppose the 2022 Bill before the Council, comments via e-mail may still be considered. It is very likely that some form of this legislation will pass, and voting on the legislation may occur as early as the middle of November. We strongly urge you to make your concerns known as soon as possible. We can assist with the review or preparation of related materials for your submission. Comments may be submitted by email at housing@dccouncil.gov. Note that any comments provided at this point will not be made a part of the record but may guide Council positions in whether and how the bill is passed.

The attorneys in Ballard Spahr’s Mixed-Use, Condominium, and Multifamily Development Group can assist developers with any further questions about this proposed legislation, condominium warranty liability generally, and as it relates to any other real estate issue. Please contact us for more information.

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